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AC408 - ADVANCED ACCOUNTING
PROF. ROEL E.
HERMOSILLA
FRANCHISE ACCOUNTING
Cash
Notes receivable
80,000
160,000
Franchise Accounting
Page 2
Discount on notes receivable
Deposit on franchise or Unearned Franchise Fees
P80,000 + (P40,000 x 3.17)
Aug. 15, 8:
33,200
206,800
25,000
Nov. 10, 8:
10,000
Dec. 31, 8:
6,340
Jan. 10, 9:
35,000
Jan. 15, 9:
Deposit on franchise
Franchise revenue
206,800
Franchise costs
Deferred franchise costs
70,000
Cash
Notes receivable
40,000
11,314
July 1, 9
Dec. 31, 9
25,000
10,000
6,340
35,000
206,800
70,000
40,000
11,314
2. Jade Enterprises, a franchisor, charges new franchisees a franchise fee of P500,000. Of this
amount, P200,000 is payable at the time the agreement is signed and the balance in P100,000
non- interest bearing notes due every year thereafter. Jade agrees to assists in locating a suitable
business site, conduct a market study, supervise construction of facilities, and provide initial
training for employees.
Required:
Assuming an implicit interest rate of 12%, prepare first year entries relating to each of the
following assumptions:
1.
Down payment is refundable, but no services have been rendered so far; collection of notes is
reasonably assured.
2.
Down payment is nonrefundable, and substantial services, costing P250,000, have been
performed; collections of notes is certain.
3.
Down payment is nonrefundable, and substantial services, costing P300,000 have been
performed; collection of notes is doubtful.
4.
Same as #3, except cost recovery method will be used.
Case 1: Deposit Method
Cash
200,000
Note receivable
300,000
Discount on notes receivable
59,800
Deposit on franchise
440,200
Case 2:
Case 3:
200,000
300,000
250,000
250,000
440,200
Installment Method
Cash
Notes receivable
Discount on notes receivable
Deposit on franchise
Deferred on franchise
Cash
Deposit on franchise
Deferred franchise costs
200,000
300,000
300,000
440,200
59,800
440,200
250,000
250,000
440,200
59,800
440,200
300,000
300,000
Franchise Accounting
Page 3
140,200
63,700
63,700
PROBLEMS
I. On January 1, 2009, RCute Company signed an agreement to operate as a franchisee of Perfect
Pizza, Inc. for an initial franchise fee of P1,600,000 for a period of ten (10) years. Of this amount
P600,000 was paid when the agreement was signed and the balance payable in five annual
payments of P200,000 beginning December 31, 2009. RCute signed a non interest- bearing note
for the balance. RCutes rating indicates that it can borrow money at 20% for a loan of this type.
In return for the initial fee, the franchisor agrees to make market studies, find a location, train the
employees, and perform other related services. The following transactions describe the
relationship with Perfect Pizza, a franchisee:
2009
Jan. 1:
April 1:
Franchise Accounting
Page 4
b.
What entry should be made by Snack International on January 1, 2008, if the down payment is
refundable and substantial future services remain to be performed by Snack International?
c.
How much revenue from franchise fees would be recorded by Snack on January 1, 2008, if:
1. The initial down payment is not refundable, it represents a fair measure of the services
already provided, a significant amount of services is still to be performed by Snack
International in future periods, and collectibility of the note is reasonably assured?
2. The initial down payment is not refundable and no future services are required by the
franchiser, but collection of the note is so uncertain that recognition of the note as an
asset is unwarranted?
3. The initial down payment has not been earned and collection of the note is so uncertain
that recognition of the note as an asset is unwarranted?
MULTIPLE CHOICE
1. On December 31, 2008, Chowqueen, Inc. authorized Mr. Chun to operate as a franchisee for an
initial franchise fee of P150,000. Of this amount, P60,000 was received upon signing the
agreement and the balance represented by a note due in three annual payments of P30,000 each
beginning December 31, 2009. The present value on December 31, 2008, for three annual
payment appropriately discounted is P72,000. According to the agreement, the non- refundable
down payment represents a fair measure of the services already performed by Chowqueen and
substantial future services are still to be rendered. However, the collectibility of the note is not
reasonably assured. Chowqueens December 31, 2008, balance sheet unearned franchise fee
from Mr. Chuns franchise should report as:
a. P132,000
b. P100,000
c. P - 0 d. P72,000
2. On December 31, 2009, Shabu-Shabu Inc. signed an agreement authorizing Alrene Company to
operate as a franchise for an initial franchise fee of P50,000. Of this amount, P20,000 was
received upon signing of the agreement and the balance is due in three annual payment of
P10,000 each, beginning December 31, 2010. No future services are required to be performed.
Alrene Companys credit rating is such that collection of the note is reasonably assured. The
present value at December 31, 8 of the three annual payments discounted at 14% (the implicit
rate for a loan of this type) is P23,220. On December 31, 2009, Shabu-Shabu should record
earned franchise fees of:
a. P23,220
b. P43,220
c. P30,000
d. P 0
3. On December 31, 2012, Da Girl Company signed an agreement to operate as franchisee of
Wendys for a franchise fee of P80,000. Of this amount, P30,000 was paid upon signing of the
agreement and the balance is payable in five annual payments of P10,000 each beginning
December 31, 2013. The present value of the five payment, at an appropriate rate of interest, is
P56,000 at December 31, 2012. The agreement provides that the down payment is not
refundable and no future services are required of the franchisor. The collection of note receivable
is reasonably certain. Wendys Company should report unearned revenue from franchise fee in its
December 31, 2008 balance sheet at:
a. P80,000
b. P30,000
c. P66,000
d. P 0
4. Each of the Yellowwich Pizza Companys 21 new franchisees contracted to pay an initial franchise
fee of P30,000. By December 31, 2010, each franchise had paid a nonrefundable P10,000 fee and
signed a note to pay P10,000 principal plus the market rate of interest on December 31, 2011,
and December 31, 2012. Experience indicates that five franchisees will default on the additional
payments. What amount of earned franchise fees would Yellowwich Pizza Company report at
December 31, 2010:
a. P400,000
b. P610,000
c. P600,000
d. P530,000
5. Mels Pizza Hot, Inc. grants a franchise to Mr. AA for an initial franchise fee of P1,000,000. The
agreement provides that Mels Pizza Hot, Inc. has the option within the one year to acquire
franchisees business and its seems certain that Pizza Hot, Inc. will exercise the option. On Pizza
Hot, Inc. books, how should the initial franchise fee be recognized?
a. Deferred revenue and to be amortized.
b. Realized revenue.
c. Extraordinary revenue.
d. Deferred revenue and treated as a reduction from Pizzas investment when the option is
exercise.
6. On Dec. 29, 2009, FIESTA HAT signed a franchising agreement for the operation of an outlet in
Dagupan City by Sombrero Co. The franchising agreement required the franchisee, Sombrero Co.,
to make an initial payment of P200,000 upon signing of the contract and three payments each of
P100,000 beginning one year from the agreement date and yearly thereafter. The franchisor
agrees to prepare market studies, find a suitable location, train employees, and perform some
other related services. The location, train employees, and perform some other related services.
The initial payment is refundable until substantial performance is effected. In 2009, FIESTA HAT
should report franchise fee revenue of:
a. P-0b. P200,000
c. P125,000
d. P500,000
Franchise Accounting
Page 5
7. Jollibee, franchisor, entered into a franchising agreement with Jo Levy, franchisee, on October 31,
2009. The total franchise fee is P500,000, of which P100,000 is payable upon signing of the
agreement with the balance payable in four equal annual installments. The down payment is
refundable in the event the franchisor fails to render stipulated services and, thus far, none has
been performed. When Jollibee prepares its October 31, 2009 financial statements, the franchise
fee revenue to be reported is:
a. - 0 b. P400,000
c. P100,000
d. P500,000
8. The franchise agreement between Jolly-R and Mr. Chris which was signed at the beginning of the
year required a P500,000 franchise fee payable P100,000 upon signing of the franchise and the
balance in four annual installments starting the end of the current year. At the time of the
granting of the franchise, the present value using 12% as discount rate of the four installments
would approximate P199,650. The fees once paid are not refundable. The franchise may be
cancelled subject to the provisions of the agreement. Should there be unpaid franchise fee
attributed to the balance of main fee (P500,000), same would become due and demanable upon
cancellation. Further, the franchisor is entitled to a 5% fee on gross sale payable monthly within
the first ten days of the following month. The Credit Investigation Bureau rated Mr. Chris as AAA
credit rating. Further the balance of the franchise fee was guaranteed by a commercial bank. The
first year of operations yielded gross sales of P9 million. As of the signing of the franchise
agreement, Jolly-Rs unearned franchise fee amounted to
a. P649,650
b. P400,000
c. zero
d. P199,650
9. Croley Snack granted a franchise to Eat N Eat for the Ortigas area. Eat N Eat was to pay franchise
fee of P100,000 payable in five equal annual installments starting with the payment upon signing
of the agreement. The franchise was to pay monthly 1% of gross sales of the preceding month.
Should the operations of the outlet prove to be unprofitable, the franchise may be cancelled with
whatever obligations owing Croley Snack in connection with the P100,000 franchise fee waived.
The first year generated a gross sales of P500,000. Croley Snack earned franchise fee for the first
year amounted to
a. P5,000
b. P25,000
c. P105,000
d. P20,000
10. Kitchenics Inc. awarded its franchise to Wings Co. in Cebu for a total fee of P100,000. Of said
amount, P50,000 was payable upon the signing of the franchise agreement and the balance,
payable in two annual payments of P25,000 each. Kitchenics had been very successful in Metro
Manila with 100 franchisees but Cebu was the first outside Metro Manila. Kitchenics agreement
with Wings provided that in the event the first year of operations would result to an operating
loss, the franchising agreement may be cancelled without need of returning any portion of paid
franchise fee and there would be no need to pay any balance of the unpaid franchise fee. The
entry to record the granting of the franchise to Wings was
a Cash
P50,000
.
Notes receivable
50,000
P100,000
Cash
50,000
Notes receivable
50,000
50,000
50,000
c
.
No entry
d
.
Cash
50,000
Notes receivable
50,000
/reh
100,000